01, Chinese Yuan Breaks 7
Following a series of increases last week, the offshore exchange rate of the Chinese yuan experienced another significant rise today, with the increase exceeding 700 points. The exchange rate of the yuan against the US dollar returned to 6.95, successfully breaking through 7.0, and it is still rapidly appreciating.
Not only is the offshore exchange rate rising sharply, but the onshore exchange rate also recovered the 7.0 threshold during the morning session, returning to the position before September.
On September 15th of this year, the offshore exchange rate of the yuan first broke through 7.0. Although there were some fluctuations afterward, it continued to decline. It wasn't until November 3rd that it reached its lowest point of 7.35.
However, it took a month and a half to drop from breaking 7.0 to 7.35, yet it only took a month to rise from 7.35 to 6.95. Especially in the last less than 5 trading days, the yuan exchange rate has risen from 7.2594 to the current 6.9482, an increase of over 3100 points.
At the same time, the US Dollar Index has been continuously falling. At the beginning of November, the US Dollar Index was still above 111.5, but it has now dropped to 104.1.
After a period of fluctuation, the US dollar is likely to fall rapidly again.
Therefore, we have also observed that since November, the exchange rate of the yuan against the US dollar has shown a clear appreciation, both onshore and offshore. The onshore exchange rate rose by 3.1% in November, while the offshore exchange rate increased by more than 4%, gaining 2900 points.
02, Central Bank Speaks Out
The Deputy Governor of the People's Bank of China pointed out at a recent forum that due to the persistent high inflation in Europe and the United States, central banks in these countries had to raise interest rates significantly. However, these rate hikes have led to a recession in developed economies.It now appears that monetary policy remains in a contractionary state, hence the US dollar will continue to fluctuate at high levels. However, the US dollar index no longer has the foundation for a significant strengthening in the future. It seems that the appreciation cycle of the US dollar has come to an end, and it will enter a depreciation cycle in the future.
A few days ago, the People's Bank of China governor also delivered a speech at a seminar hosted by the Bank for International Settlements.
He pointed out that during the previous period when the US dollar kept appreciating, the currencies of some emerging economies and low-income countries depreciated significantly, and there was also a situation of capital outflow and return to the United States.
Under the continuous pressure of interest rate hikes in the United States, many countries had to follow suit to avoid the devaluation of their currencies. However, this also led to the continuous increase in loan interest rates in many countries, which will directly affect the growth of the global economy in 2023.
The risk of recession in some countries is continuously increasing, and it is becoming increasingly difficult for central banks around the world to suppress inflation while maintaining growth.
So far, China's performance has been quite good.
The central bank also released the monetary policy report for the third quarter a few days ago. Currently, our country's foreign exchange reserves still rank first in the world, which is an important foundation for exchange rate stability.
In terms of international balance of payments, it still performs smoothly, and there have been no significant fluctuations in the operation of the foreign exchange market. The overall balance of payments is balanced, and foreign capital is in a state of net inflow.
03, Future Trends
A recent article by the deputy director of the Chinese Academy of Social Sciences pointed out that the exchange rate of the renminbi will fluctuate between 7.0 and 7.4 before the end of the year, and it will only show a significant rebound against the US dollar in the second half of 2023.In response to this, my perspective is slightly more optimistic: the currency will fluctuate around 7.0 in the coming period, and the Federal Reserve will eventually reduce the rate hike to 25 basis points in February next year. At that time, the Chinese yuan will begin to rise steadily, without having to wait until the second half of next year.
The reason stems from what was mentioned earlier: the appreciation potential of the US dollar has been exhausted, and it will likely turn downward in the future. On the other hand, signs of a rebound in our country's economy are becoming increasingly evident, and the economic growth rate should further stabilize and rebound in the first half of 2023.
Conversely, the US economy will begin to enter a significant recession next year. With these opposing factors, a substantial rebound in the Chinese yuan will be noticeably ahead of schedule.